F-Squared Investments, the largest provider of exchange traded fund managed portfolios, has taken its lumps.
In December, F-Squared agreed to pay $35 million and admit wrongdoing to settle charges it falsely advertised historical returns for the firm’s flagship ETF strategy, the Securities and Exchange Commission said.
“The SEC separately charged the firm’s co-founder and former CEO Howard Present with making false and misleading statements to investors as the public face of F-Squared,” said the Commission in a statement. [Changes at the Top at F-Squared]
In November, Present left the firm and was replaced by Laura Dagan. Last week, Virtus Investment Partners (NasdaqGS: VRTS) said it replaced F-Squared as a subadviser on five AlphaSector mutual funds.
With all that, it would appear easy to count F-Squared out. However, that could prove to be a fool’s bet over the long term. F-Squared has been making contingencies to prepare for client departures, such as the loss of Virtus, and those contingencies could pay dividends over the long haul.
As recently reported, F-Squared has gained significant momentum in the 401k marketplace as QDIA options are expanding and their offering of risk-managed portfolios have garnered attention over traditional target-date funds.
As another example, F-squared is increasing its footprint in ex-U.S. markets. The company serves as a sub-advisor for one of the fastest growing funds in Canada and participates in a fund of funds with one of the largest banks there, said Sharon French, principal at F-Squared, in an interview with ETF Trends.
While Canada’s ETF market is not on par with that of U.S. in terms of sheer size, ETFs are growing north of the border. ETF assets there have doubled over the past five years while the number of Canadian exchange traded products has climbed tenfold over that period, according to ETFGI data.
French added that F-Squared is looking to increase its footprint in Europe where ETF assets recently crossed $500 billion for the first time, finishing April at $511 billion, according to ETFGI.
French acknowledges that the F-Squared brand is “bruised,” but she adds that hasty rebranding would lack credibility and that clients “still appreciate the value of our technology that is designed to protect as well as grow wealth for investors.”
Regarding F-Squared clients, obviously there have been departures, but the motive for those exits should be taken into account. It is purely an issue of F-Squared’s currently battered reputation.
“No clients have fired us related to our algorithms, the model or our ability to manage downside risk,” said French. “Given the overheated state of the market, it’s the wrong time to be getting out of F-Squared portfolios.” This is another reason that current clients have stuck with F-Squared.
New clients agree. Today, F-Squared said it has entered into a partnership agreement with SoHo Asset Management LLC to use its Portfolio Replication Technology investment capabilities to create and manage model portfolios for SoHo’s clients in Asia and the United States under SoHo’s Replicas brand.
According to Laura Dagan, this partnership with SoHo allows F-Squared to expand their international opportunities into the fast-growing Asia investment market. Assets in ETFs/ETPs listed in Asia Pacific (ex-Japan) reached a new record high of 125.3 billion US dollars at the end of April, according to ETFGI’s preliminary monthly ETF and ETP global insight report for April 2015.
“Singapore is a crucial market given the country’s focus on financial services, its concentration of private wealth, and its high credit rating. It also represents an endorsement of F-Squared’s leading edge investment technologies which include its AlphaSector strategies,” said F-Squared in a statement.
French notes that “regaining credibility with investors and the community is a priority.”
Last month, it was reported that F-Squared is looking for a buyer or a strategic partner, which could help with the firm’s rebranding efforts, particularly if a buyer opts for a majority stake of the strategist. Given the exponential growth of the ETF industry, it is not surprising to learn some suitors have already been kicking F-Squared’s tires. [F-Squared Reportedly Looking for a Buyer]
ETF managed portfolios are investment strategies that hold more than 50% of assets invested in ETFs. A group of ETF Strategists package portfolios of ETFs into investment strategies to meet a wide range of investor demands, providing stand-alone investment strategies or a one-stop complete offering. Many portfolios can be adjusted to adapt to changing market conditions and most employ a rules-based process based on technical or quantitative factors.
ETFs used across F-Squared strategies include the iShares MBS ETF (NYSEArca: MBB), Technology Select Sector SPDR (NYSEArca: XLK) and the First Trust Emerging Markets AlphaDEX Fund (NYSEArca: FEM).